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How Is My Credit Score Calculated?

Real estate investing gets a whole lot easier when you understand your credit score.

There are a couple different types of credit scores, but the numbers we’ll use here reflect FICO scores (the most widely used credit score for most lenders).

Credit scores range between 0 and 850. More than 740 is great, and a score of less than 700 begins to limit your options.

This number is calculated by looking at five main pieces of information:

  • Credit mix
  • New Credit
  • Credit History
  • Payment history
  • Amounts owed

Credit Mix

Close to 10% of your score is based on the mix of credit you already have.

Do you have seven credit cards?

Or zero?

Do you have a car payment, a mortgage, student loans, personal loans?

Typically, the more diverse your lines of credit are, the better it is for your score.

New Credit

Around 10% is based on “new credit,” or how often you get credit inquiries or open a new line of credit.

New credit can temporarily lower your score. So for example, if you buy a new car, you’ll probably have trouble securing a loan for a property right away.

Length of Credit History

About 15% of your score is calculated based on how long you’ve had your lines of credit.

If you opened your first line of credit less than 5 years ago, you’ll have a lower score than someone whose credit is 40 years old.

Amounts Owed

These last two categories are the most important. They make up two-thirds of your credit score.

About 30% of your score is determined by something called amounts owed. Amounts owed is about your debt. More specifically, it’s about how much of your available credit you’re using.

For example, let’s say your credit card has a max of $1,000. You buy a new set of tires and brakes, so now you owe $1,000 on your card. You’re using 100% of your $1,000 limit – you’re maxed out.

The story creditors see when they look at you is that you’re not managing your credit well. They’ll assume you won’t manage other loans well either, so you get a lower score.

But let’s look at another situation.

Say you got a different credit card with a max of $5,000. That same borrowed $1,000 has a way different effect on your credit score. You’re only using 20% of your credit line, and you’re leaving 80% at your disposal. Creditors like that story. So you get a higher score.

Payment History

The biggest amount of your score, up to 35%, is based on your payment history.

Payment history is exactly what it sounds like:

  • How are you paying your bills?
  • Do you always pay on time?
  • Have you had any bankruptcies?

Financial institutions can see this information, and it’s the top factor they consider. At the end of the day, lenders want to know: Will you pay them back? On time?

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How Your Credit Score Impacts Your Real Estate Investments

How Your Credit Score Impacts Your Real Estate Investments

How Your Credit Score Impacts Your Real Estate Investments

Did you know your credit score impacts your wallet…and the cash flow you get from your real estate investments?

Because the better your credit score, the better, easier, and more profitable your investments will be. Because your credit score determines your interest rates, the amount of money you need to put into each deal, and what kind of loans are available. If you have a low credit score, then you can expect to:

  • Pay high interest rates.
  • Put more of your money into each deal.
  • And have fewer loan options available.

So, yeah. Your credit score matters.

But…what is a credit score?

Well, basically, it’s a number between zero and 850, and this number helps lenders decide if they can trust you with their money.

You see, financial institutions don’t know you. Unfortunately, you’re just another face in the crowd. So, in order to get to know you better, they created a scoring system that helps them understand you and your financial habits.

Again, you want to aim for a high credit score. Generally speaking, anything below 700 is going to cost you time and money, and lead to a lot of disappointment and frustration.

How does your credit score get calculated?

Well, multiple factors get considered, but the two biggest ones are your payment history and amounts owed.

First, your payment history is exactly what is sounds like. Financial institutions can see how you pay your bills, how often you pay them, how late you pay them, and if you pay them at all.

As for amounts owed, this is how you utilize your credit lines.

For example, if Jane and Joe both owe $1,000 on their credit cards, they can still have very different credit scores. Because Jane’s card is maxed out at $1,000, while Joe’s credit card is maxed out at $5,000.

So, creditors see Jane as a risk, because she’s not managing her credit very well. She’s 100% tapped out.

Joe, on the other hand, isn’t a risk, because he still has another $4,000 at his disposal. So, unlike Jane, he’s only using 20% of his available credit. And creditors like that!

That’s why, at the end of the day, Joe’s credit score will be higher than Jane’s.

So, what kind of score should you really aim for? Well, for the best loans with the best rates, you’ll want a score that’s higher than 740. Anything above 800 is considered exceptional. If you have this kind of score, then you’ll likely always hear “yes” from lenders, rather than “no.”

Now, if your score lands between 670 and 739, then you’ll still be in a good position for a decent loan with decent rates.

Anything below 670 is…not so good. But that’s okay, because there are easy ways to quickly raise your credit score.

#1: Add more credit to your credit line

Remember Jane? Well, she can go to her credit card company and ask them to raise her limit from $1,000 to $3,000. That would drastically impact her credit score, because she’ll go from using 100% of her available credit to only 33%.

#2: Get authorized on someone else’s GOOD credit account

A good credit account means it’s paid on time, it’s existed for a while, and it has a low balance. So, think about asking a parent, a friend, or someone else you trust if they’ll add you as an authorized user to their credit card account.

#3: Go private

This means borrowing money from someone or someplace so you can pay off all of your credit cards for 60 or so days. During that time, you can apply for more credit.

Basically, your credit score determines your path. If you want to pay lower rates, use less of your own money, and have more loan options, then you need to focus on raising your score.

Just remember, a high credit score will make your fix and flips, rentals, and other real estate investments a whole lot easier and way more profitable.

Happy investing!

Credit Score Basics: How Lenders Use FICO Scores

How Lenders Use Your FICO Score

How Lenders Use Your FICO Score

Do you know how lenders use your FICO score? Because it’s vital to whether or not you get approved for a loan.

If you understand credit score basics, then you’ll have a much better chance of hearing a “yes” rather than a “no” from a lender. You’ll also gain a much deeper understanding of how your score impacts your monthly payments.

You see, when you have a decent credit score (700+), then you can expect to see more loan approvals. Especially from traditional lenders, like banks.

Plus, a good credit score will lead to good rates. And that means cheaper bills.

For real estate investors, a good credit score can make all the difference between positive and negative cash flow. And over time, that kind of business model can run you…well, out of business.

If you’d like a quick overview of how credit scores work and how lenders use them, then check out this explanatory video from FICO.

In this video, you’ll get a simple and fast explanation of how credit scores work. Again, this is vital if you want to succeed with your real estate deals. And your overall financial health. Your wallet will thank you for taking such good care of your credit score.

If you want more credit score tips, check out our Youtube channel! As we’ve stated throughout this article, we highly encourage you to understand the importance of your score so when it’s time to get a loan for your next value-add property (fix and flip or rental), you’ll have lots of options. And access to great rates.

Need some extra input on your credit score and how you can raise it? Our team is always here to offer advice and guidance.

As always, happy investing!